Interest rates have been inching up ever since the Federal
Reserve officials began the 'taper' talk, even though there is a
lot of disagreement among the market participants about the
likely time of start of 'tapering'. The benchmark 10-year
interest rate yield is now ~2.90%, a sharp increase from a low of
1.61% reached earlier this year. (Read:
3 Sector ETFs to profit from rising rates
Although many investors tend to shy away from bond ETFs in the
current rising rate environment, there are still a number of
appropriate choices in the fixed income ETF world. These products
can help investors reduce their dependence on equities, while
providing a nice regular payment above most stocks. At the same
time, unlike most other fixed income instruments, these products
do not lose value when the rates increase.
In the junk bond space, there is an often overlooked slice of
the market that could be an interesting choice for those with
minimal levels of exposure to the market. This corner has been
the senior loans market, which provides investors some shelter
from higher interest rates with above-average yields. (Read:
Junk Bond ETF Investing: Is It Too Late?
What is a Senior Loan?
Senior loans, also known as leveraged loans, are private debt
instruments issued by a bank and syndicated by a group of banks
or institutional investors. These provide capital to companies
that have below-investment grade credit ratings. In order to
compensate this high risk, senior loans usually pay higher
Since the securities are senior to other forms of debt or
equity, senior bank loans offer protection to investors should
there be a credit event, especially if the loans are secured by
property, equipment or other company items. As a result, default
risk is low in this type of bonds, although these loans are
issued on higher risk companies.
Further, senior loans are floating rate instruments and
provide protection from rising interest rates. This is because
senior loans usually have rates set at a specific level above
LIBOR and are reset every three months, which help in eliminating
interest rate risk (read:
Time to Buy Floating Rate ETFs?
Thanks to this, senior loans could be a nice mix between high
income and lower interest rate sensitivity making them ideal
investments for many. Further, they have low correlations with
most other asset classes and could add diversification benefits
to the portfolio. Thus, senior loan ETFs have gained immense
popularity in recent months. The space has already proven to be a
solid choice for yield without taking on too much interest rate
Investors seeking decent yield in the current interest rate
environment and willing to take some additional credit risk could
play with senior loan ETFs analyzed below.
PowerShares Senior Loan Portfolio Fund (
The fund tracks the S&P/LSTA U.S. Leveraged Loan 100 Index
which acts as a benchmark for the largest institutional leveraged
loans based on market weightings, spreads and interest payments.
The ETF holds 132 securities in the basket with the vast majority
maturing between one and 10 years.
With the average days to reset being just over 37, interest
rate risk is minimal. Though senior loans account for a hefty 89%
of the assets, high yield securities also make up for the
remaining portion in the basket (read:
HYLD: Crushing the High Yield ETF Competition
The ETF debuted in March 2011 and is relatively expensive when
compared to other ETFs focused on the low end of the debt market.
The current expense ratio is 76 bps a year, which is thrice the
low cost junk bond ETFs. However, the product enjoys heavy
liquidity with average daily volume of roughly 2 million shares,
suggesting no additional cost for the fund.
Though BKLN provides exposure to intermediate term securities,
it has seen an amazing surge in popularity so far in 2013. The
fund has gathered over $2.2 billion so far this year, propelling
the total asset base to $5.3 billion. The ETF has added 0.57% in
the year-to-date time frame while yields 3.57% in annual
dividends and 3.86% in SEC 30-Day yield.
SPDR Blackstone/GSO Senior Loan ETF (
This is the first actively managed ETF for senior loans and
provides investors with current income, along with the
preservation of capital. It does not track an index but will
instead seek to beat the Markit iBoxx U.S. Leveraged Loan 100
Index through superior security selection (read:
State Street Launches Senior Loan ETF
This is done by partaking in credit analysis, and timely sales
and buys of senior loans. For example, the active approach looks
to acquire loans at attractive prices before adding those to an
index, or find loans that are likely to be removed from a
benchmark and then proactively sell them before being kicked out
of an index.
Overall, the fund holds 98 securities and charges 90 bps a
year in fees, a bit higher than the two passively managed
counterparts. Average days to reset is nearly double than the
ultra-popular BKLN (see more in the
The ETF has seen great deal of investor interest since its
debut in Apr 2013 and has attracted roughly $493 million in AUM.
Trading volume is also solid with more than 84,000 shares per
Highland iBoxx Senior Loan ETF (
Launched in Nov 2012, this fund seeks to match the price and
yield performance of the Markit iBoxx Liquid Leveraged Loan
Index, before fees and expenses. The ETF has reached $105 million
in total asset base.
The product is cheap relative to other options in the space,
charging investors 55 bps a year in fees. Average days to reset
are 37 and yield to maturity is 5.32% (read:
Buy These ETFs to Profit from The Great Duration
SNLN is trades in average daily volume of roughly 35,000
shares. This suggests a wide bid/ask spread, probably increasing
the total cost for the fund. The ETF added 1.02% year-to-date and
pays a decent 1.23% in dividend per annum.
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PWRSH-SNR LN PR (BKLN): ETF Research Reports
HILND/IBX-SR LN (SNLN): ETF Research Reports
SPDR-BS GSO SL (SRLN): ETF Research Reports
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